Kaman Corporation
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to Kaman Corporation Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference call over to Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

[Eric B. Remington:]

Thank you. Good morning. Welcome to the Kaman Corporation Third Quarter 2014 Conference Call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Senior Vice President and Chief Financial Officer. Before we begin this morning, please note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on the plans and objectives of the company or its management, statements of future economic performance and assumptions underlying these statements regarding the company and its business. The company's actual results could differ materially from those indicated in any forward-looking statements due to many factors, the most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's 2013 annual report on Form 10-K and the current report on form 8-K filed yesterday evening together with our earnings release. In addition, in our press release and on this teleconference, we'll discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in the tables of our press release, which has been filed with the SEC and posted to the Investor Relations section of our website, which can be accessed at www.kaman.com. With that, I'll turn the call over to Neal Keating. Neal?

[Neal J. Keating:]

Thank you, Eric. Good morning, and thank you for joining us today. Overall, diluted earnings per share in the third quarter were $0.60 adjusted. Our performance was driven by Aerospace, which once again delivered strong margins. While at Distribution, we continued to implement our growth initiatives, including the addition of new sales resources and the initial rollout of our new ERP system. While these initiatives had an impact on profitability, they are important elements of our strategy to achieve higher, more sustainable margins over the longer term. Through focused working capital initiatives, we delivered strong free cash flow for the quarter, allowing us to raise our free cash flow outlook for the year. Looking at each of our segments, beginning with Aerospace, we achieved year-over-year sales growth of 2% despite a challenging macro environment that included the wind down of the C-17 and Egyptian FHQ upgrade programs in addition to lower sales of BLACK HAWK cockpits. These sale declines were more than offset by increased revenue recognized under the AH-1Z cabin program, initial deliveries of the 747-8 Wing-to-Body Fairings, higher A-10 shipments and contributions from the New Zealand SH-2G(NYSE

[Robert D. Starr:]

Thank you, Neal, and good morning, everyone. I'd like to begin this morning by reviewing our results before moving to our revised 2014 outlook. At a consolidated level, GAAP earnings per share from continuing operations was $0.53 in the quarter with adjusted earnings per share at $0.60 after adjustment for the cost associated with the sale of our Moosup facility and restructuring charges at Distribution. The $0.08 increase in adjusted earnings relative to the prior year was driven by a number of factors, including unfavorable product mix changes at Aerospace and the near-term impact of our growth initiatives at Distribution. I want to spend a minute on our SG&A expenses, as a number of items have impacted the comparability of our results with the prior year. For the third quarter, our reported SG&A expenses as a percentage of sales were 22.4%, 180 basis points higher than the prior year. Acquisitions, ERP depreciation, the Moosup charge and severance costs at Distribution negatively impacted our SG&A ratio by 90 basis points for the quarter. For the year-to-date period, our reported SG&A expenses as a percentage of sales were also 22.4%, 40 basis points higher than the prior year. Acquisitions, ERP depreciation, the Moosup charge and severance costs at Distribution, negatively impacted our SG&A expense ratio by 30 basis points for the year-to-date period. In absolute terms, our year-to-date SG&A expense adjusted for the previously mentioned items has increased by $7.2 million or 2.6%. Free cash flow performance in the quarter was very strong at $27.5 million, as we continued our disciplined focus on improving working capital metrics. For the year-to-date period, we have generated data $21.3 million in free cash flow and are $26.6 million ahead last year's results. Taking a closer look at segment performance beginning at Aerospace, we achieved sales of $154 million, a 2% increase over the prior year and achieved our highest operating margin of the year at 17.4%. On a comparative basis, this is 90 basis points lower than the prior year largely as a result of a lower mix of direct commercial Joint Programmable Fuze deliveries and the wind down of our Egyptian SH-2G(I) upgrade program. Our engineering services group continues to experience near-term challenges, which also impacted our third quarter results. These headwinds were partially offset by higher profit on the New Zealand SH-2G(I) program and improved performance of our composite programs. Our Specialty Bearings product lines continued to perform well and they have seen strong order intakes providing confidence for their future performance. We've had a solid year-to-date result at Aerospace with revenues increasing 3% over the prior year to $458 million, while delivering strong margin results. We have shipped increasing volumes of our Joint Programmable Fuzes and a number of other programs including our SH-2 and 747-8 programs have ramped up during 2014, providing us offsetting growth as our BLACK HAWK deliveries have declined and our C-17 program has wound down. Operating margin year-to-date in Aerospace is 16.5% compared to 17.4% in the prior year. Impacting our year-to-date margins are the absence of the onetime specific[indiscernible] Bearing orders that benefited from last year and lower levels of direct commercial shipments for Joint Programmable Fuzes to foreign customers. Moving now to Distribution. Our third quarter consolidated sales were a record $309 million, a 13% increase over the prior year, largely driven by a recent acquisition of B.W. Rogers. Operating income for the quarter was $13.3 million or 4.3% of sales, 4.5% adjusted for severance costs incurred in the quarter, compared to $14.7 million or 5.4% of sales in the prior year. Operating margin levels in the quarter were impacted by the previously referenced shortfall in sales, near-term net costs associated with our sales force initiatives, higher ERP expenses as well as weaker-than-expected result at our Mexico operations. As we have discussed on prior calls, we anticipate the costs associated with our new sales resource initiatives to remain dilutive to margins through year-end and expect that initiative to provide incremental benefits beginning next year. Distribution year-to-date results have shown considerable progress when measured against the prior year. After adjusting for the severance costs we incurred in the third quarter, Distribution's year-to-date operating margin is 4.6%, a 50 basis point improvement over the prior year. This result translates into a 22% increase in operating profit dollars on nearly 10% sales growth. On a same-store basis, our daily sales rate is up 2.3% in the year-to-date period, and our operating income dollars at distribution have increased by 11%. Turning now to our outlook. We have made a number of adjustments based on our year-to-date performance and our visibility for the balance of the year. At Aerospace, we are lowering our estimate for full-year sales to a range of $630 million to $640 million. This result is primarily from Aerosystems program push-ups, most notably on the BLACK HAWK cockpit, AH-1Z Fuselage program and the Peru program. We are raising Aerospace's operating income range to 16.8% to 17.0% to reflect change in the expected fourth quarter sales mix. At the midpoint of our revised sales and operating margin outlook, the operating profit dollars for Aerospace remained essentially unchanged from our previous outlook. In Distribution, we have tempered our view of near-term organic sales growth due to the project pushouts at our Automation, Control and Energy platform, weaker-than-anticipated demand within the domestic mining sector and continued weakness at our Mexico operation. Accordingly, we have lowered our sales ranged slightly to $1.185 billion to $1.195 billion. Based upon our full-year results and our revised sales outlook, we have lowered our full year operating income margin outlook to a range of 4.5% to 4.6%, including the third quarter severance charges. In addition to the changes at the segment level, we are also lowering our outlook for corporate expense to $51 million from $52 million, reflecting our continued focus on expense control. I want to highlight, this number excludes the $2.3 million charge taken in the third quarter relating to the sale of our former Moosup facility. Our full year tax rate is expected to be a full point lower than our previous outlook and should come in around 34%. Finally, we have increased our full year free cash flow expectation to a range of $55 million to $60 million, which represents a significant increase over our initial full year guidance of $40 million to $45 million, reflecting our continued focus on improving cash flow performance. With that, I'll turn it back over to Neal. Neal?

[Neal J. Keating:]

Thanks, Rob. As I said earlier, we faced several challenges during the quarter but have also taken important steps forward. In Distribution, we delivered double-digit consolidated growth, delivered our fourth consecutive quarter of positive organic growth while also implementing the first phase of our ERP conversion. In Aerospace, we were able to deliver continued organic growth despite reductions in a number of key programs, improved our operating margins on a sequential basis, completed our transition into new facilities in Germany and the U.K. and expected to finalize a contract in the near-term that will significantly expand our SH-2 fleet. And finally, we have been able to increase our full year free cash flow outlook. With that, I'll turn the call back over to Eric. Eric?

[Eric B. Remington:]

Thanks, Neal. Operator, may we have the first question, please?

[Operator:]

[Operator Instructions] Your first question comes from Arnie Ursaner.

[Arnold Ursaner:]

In your prepared remarks, you mentioned that the sales force build that was dilutive to margin and will be through year end. Can you give us a sense of the margin headwind you're incurring in 2014, and how you're internally thinking about a margin goal for Distribution from these added salespeople in 2015?

[Robert D. Starr:]

It's Rob. In taking a look at the sales force initiative in the third quarter, Arnie, that had an approximate 20 basis point impact on the quarter. We expect that impact to certainly moderate in the fourth quarter while still being somewhat negative. And certainly, as we enter 2015, as we've talked about, we would expect that to provide incremental earnings, as we go through '15.

[Arnold Ursaner:]

Any attempt to quantifying a margin goal for Distribution for 2015?

[Robert D. Starr:]

Not at this time, Arnie, but certainly, I think it's fair to say that we expect this to generate incremental margins that we would anticipate being segment average. I really can't give a lot more than that.

[Arnold Ursaner:]

Okay. And then, Neal, in your remarks, you highlighted domestic mining in Mexico were particularly weak in Distribution. How far down were both of those?

[Robert D. Starr:]

Certainly -- if it's okay. In Mexico, Arnie, we experienced, let's call it, slightly double-digit declines in Mexico. And then in the domestic mining sector, it was weaker than expected. But certainly, a negative headwind for us relative to prior periods and our expectations.

[Operator:]

And your next question comes from Jeff Hammond.

[Jeffrey D. Hammond:]

So maybe just to follow on Arnie's questions about Distribution margins, can you maybe just walk us through the number of what you think are one-timers in '14 that would be -- whether it be this ERP issue, any kind of purchase accounting costs and maybe the sales force headwind? Because it seems like if all that goes away, you get maybe some nice snap back in the margins in '15.

[Robert D. Starr:]

Sure. Now that's fair. Just taking a look at the main items here, Jeff. We'll start with the purchase accounting on B.W. Rogers. As we highlighted in the earlier call, we expected about $3.2 million in onetime charges this year relating to B.W. Rogers. About $1.5 million of that is transaction expenses and about $1.7 million relate to purchase accounting, which would be inventory write-up, things such as intangible amortization and so forth. So that's the purchase accounting for this year, as it relates to B.W. Rogers. Taking a look at the ERP impact in the quarter, we estimate that the top line impact was approximately in the $5 million range. In terms of operating income impact for the quarter, we estimate that at somewhere between $1.5 million and $2 million and would certainly -- would anticipate that in the fourth quarter we would expect to see some continued headwind relating to ERP, although those numbers are difficult to gauge, as you can appreciate. But certainly, we expect some further impact in the fourth quarter. On the sales force initiative, we did have about a 20 basis point headwind this quarter. We expect that to moderate in the fourth quarter before turning positive, hopefully, in 2015. That's our expectation. I just want to point out, Jeff, that the acquisition cost relating to B.W. Rogers are being reflected in our corporate expense.

[Jeffrey D. Hammond:]

Okay, great. And then just to follow on. Neal, always a number of moving pieces and you talked about a number of activities and potential wins in Aero. Can you give us an early look on -- into '15 on how you're kind of thinking about growth? Do we get catch-up from some of these push-outs? And what's kind of the view on JPF, some of the moving pieces on new programs and just maybe overall commercial?

[Neal J. Keating:]

Sure, Jeff. I think that we would remain consistent in our view of mid-single-digit organic growth in the Aerospace business. As we did try to highlight in our prepared remarks, we have had both a number of program pushouts this year, which we expect we would catch up on during next year. We will also have the Peruvian contract coming in, which will certainly be positive. And I know that even earlier today, as we had a chance to review your note, you highlighted some of the decline in backlog that we've encountered this year. I think that that's clear and it's a forward indicator of our business. I hope that in our prepared remarks we were able to highlight a number of the issue -- or excuse me, a number of the contracts that we've either closed on since the end of the quarter or are very close to closing on, which will rebuild that backlog to more normalized levels. For example, a portion of the Peru contract will come in. One of the big declines, quite frankly, has been as we have run off the 767, 777 Fixed Trailing Edge contract with Boeing. We're in the final stages of negotiating the extension of that, which would be a significant addition to our backlog. And also as we continue with the AH-1Z, we currently are under contract for about 17 aircraft in our backlog, and we expect that to be a significant program for us, as we negotiate add-on contracts for the Zulu aircraft with Bell.

[Operator:]

And your next question comes from the line Peter Skibitski.

[Peter J. Skibitski:]

I just want to understand better the reduction in the Aerospace revenue guidance. You mentioned the US 60 -- excuse me, UH-60, but I thought you left your delivery guidance intact at like 90 ship sets and then maybe you could talk about the AH-1Z in terms of how many ship sets you expect to deliver for 2014 versus your prior expectation?

[Robert D. Starr:]

Sure. Pete, we'll start with the AH-1Z. We do expect to ship, during the course of the year, approximately 8 to 10 cabins. That's relative to an expectation prior that was -- let's call it roughly 5 cabins more, somewhere in that range based on our initial outlook for the year. So we're certainly seeing some slippage in terms of timing on AH-1Z. On UH 60, you are correct that the amount that was disclosed has remained consistent. We had some expectations perhaps of doing perhaps a slight bit better than that and we realize now that we're pretty much at the firm 90, now that we have only a quarter to go. So relative to some of the expectations towards the higher end of our sales range, we felt that it would be appropriate to take that down a little bit.

[Robert D. Starr:]

We'd also -- while, as you can imagine, Pete, we also had anticipated a little bit earlier conclusion of the Peruvian contract, and as many times happens with government contracts, it delayed a little bit. We feel we're very close to finalizing that. But quite frankly, that's arguably 30 to 45, maybe even 60 days later than we'd anticipated 4 to 6 months ago. It's a program we've been working on for multiple years.

[Peter J. Skibitski:]

Understood. And one question on the free cash flow guidance also. Clearly, you need working capital to kind of come through here in the fourth quarter. So maybe for Rob -- Rob, is there anything you're kind of worried about out there on your free cash flow in the fourth quarter in terms of collections or any of the other items?

[Robert D. Starr:]

No. We have a couple of key milestones, Pete, on our SH-2 program with New Zealand that will drive a good portion of the cash flow we expect in the fourth quarter, and we feel that we are certainly in a good place relative to meeting those milestones. But certainly, if something happens that we couldn't meet those milestones that would impact the cash flow results that we expect in the fourth quarter. But short of that, at Distribution, they're doing a terrific job in managing their working capital levels and elsewhere in aerospace, people are focused on it. Certainly, we've had even a slight reduction, as you'd expect, on our AH-1Z inventory quarter-over-quarter. So we're starting to turn the tide there because that has been a major consumption of working capital, as it relates to that program in particular. So no -- we feel pretty good about it, but certain it's going to come down to meeting the milestones on our New Zealand contract.

[Peter J. Skibitski:]

Okay. And then I promise one last question. Just on the cash spent for the ERP distribution, I just want to make sure I'm reading your 10-Q, right? It looks like total cost is $45 million and you already paid out $28 million of that. So I'm just wondering when the final $17 million payment comes? Is that all paid up by the end of 2015? Or does it go longer because I'm just thinking it looks like it could be a cash tailwind for you going forward as it runs off?

[Robert D. Starr:]

Certainly. No, you are correct in your understanding, Pete. We have spent $28 million of the expected $45 million relating to the Distribution ERP. That's not going to all happen in 2015. Some of that spend will go into 2016, as we roll it out.

[Peter J. Skibitski:]

And that will be the last year, 2016?

[Robert D. Starr:]

You will see. We would expect that certainly as it relates to the initial implementation, which is the initial scope of the project. Yes, we would expect that to roll off most certainly by '16.

[Operator:]

Your next question comes from the line of Matt Duncan.

[Matt Duncan:]

So Neal, you said that the organic sales growth rate at KIT was turning pretty nice through mid-September. Then it tailed off to when you went live on the ERP install. Can you quantify that for us? How much higher was it running than the 1.7% that you reported?

[Neal J. Keating:]

Matt, I want to take a step back first of all. We actually went live on our ERP at the beginning of the third quarter, so the decline in orders that we saw in the last 2 weeks of September was not directly correlated to the ERP go live. So I want to make sure that that's clear to begin with. But, Matt, it was really -- it was interesting because we were running at about a 3, maybe a little better than that percent growth rate for the quarter. And we saw that turn from about a plus 7.5% for the month down to a minus 2.5% in the last 2 weeks. So it was a very dramatic change, and it was something we hadn't anticipated. I know one of our other competitors encountered something similar. It was relatively broad-based for us in arguably 3 out of 5 reporting regions, so we can't pin it on any one area particularly, although mining in the Intermountain region did -- was probably the largest decline. And then, also as we commented, we had a nice return to mid-single-digit growth in the month of October. So I don't know that we have a very sound explanation as to why we had the kind of tail- off in that 2-week period of time as we experienced.

[Matt Duncan:]

And that mid-single-digit October, Neal, that's year-over-year, right?

[Neal J. Keating:]

That's correct.

[Matt Duncan:]

Okay. Yes. It’s interesting that that seems odd. So -- okay. Moving onto the Aerospace side. Rob, I just want to make sure I understand sort of the puts and takes here. It looks like you guys are expecting somewhere around $180 million in Aerospace revenues in the fourth quarter. Obviously, you've got 3 deliveries of SH-2G to New Zealand that are helping that number. But as we look out to next year and are trying to think through a reasonable quarterly run rate for those revenues, you're going to continue to deliver to New Zealand through it sounds like the third quarter next year. So do we need to be thinking around that, maybe $175 million to $180 million range for the first 3 quarters, then it tails off? Or is it -- just help us understand is there anything else that's helping the 4Q that's sort of one time? I just want to make sure we kind of get this dialed in a little bit before we get to the guide for next year.

[Robert D. Starr:]

Yes. No, fair enough. And clearly, we'll provide our 2015 outlook on the February call. Certainly, you're absolutely right, Matt, that the math works not that we are expecting the approximate $180 million a quarter at Aerospace. I mean that's where it shakes up. But certainly, New Zealand deliveries will impact that. Our fourth quarter typically in Aerospace tends to be our heavier quarter as we try to get shipments out prior to the end of the year and depending on customer acceptance of those. I think for next year, I think $180 million is probably a bit on the high side, Matt, to be frank. I think, as Neal referenced, we would expect somewhere in the range of growth that we had provided at Investor Day. We don't see anything at this point that would deviate us from that.

[Peter J. Skibitski:]

So the 3% to 6% growth rate is still what we should stick with for next year then?

[Robert D. Starr:]

Yes, I think being in that range is perfectly appropriate.

[Operator:]

And your next question comes from Edward Marshall.

[Edward Marshall:]

So I just wanted to follow-up on Matt's question about the cadence in the quarter here, and what gives you confidence that you'll see sales kind of accelerate, I guess sales growth rate accelerate in Distribution in the fourth quarter because I think the guidance implies anywhere between, I don't know, 15% to 18% top line growth in that business. I mean, is it the growth rate that you saw in October that gives you the confidence that those trends will continue?

[Neal J. Keating:]

I think that -- Ed, I think that we should see about a 5% organic growth rate, which would come to somewhat close to your 18%. But that would be in dollars, $18 million. So I think we're looking at about 5% organic growth rate. We would kind of break that down into 2 subcomponents. One would be that we would expect us to have an underlying 3% to maybe 3.5% organic growth, and we expect to add 1.5 to 2 points from clearing backlog that we built during the third quarter in part due to some of the ERP issues that we encountered. So about 5% organic overall.

[Robert D. Starr:]

Yes, and the remainder of that delta. You're correct, it's about an 18% or so percent increase, but a lot of that's being driven by B.W. Rogers.

[Neal J. Keating:]

Right.

[Robert D. Starr:]

In the fourth quarter .

[Edward Marshall:]

Okay. So when I look at -- switching over to the ERP side, when I look at the phases of the ERP, I mean, we're in Phase I. How many phases did you anticipate? And I guess secondarily, did you see any time -- when you talk about inefficiencies around ERP, was it on-time performance that slipped in the quarter? And if so, what percentage of sales would that have been and maybe what excess cost you had to stay on time deliver?

[Neal J. Keating:]

Ed, I'll start by saying that we will have multiple different rollouts. We likely will have some 4 to 5, as we convert 10 to 12 ERP systems to our new Infor System. I think that as we went through this, we learned quite a bit as did Infor. They supported us very strongly at all levels, as we went through this. We had a significant amount of inefficiencies more than either Infor or we had anticipated. We project it impacted us at the top line between, arguably, $4 million to $5 million in revenues for the quarter in the area of $1.5 million to $2 million on the bottom line between forego on profit on shipments and also additional resources that we had to put into the go-live effort. But we've already gone through an upgrade of the system in the last several weeks. We feel good about the improved performance that we're getting, and we know it's absolutely crucial to our being able to hit our long-term margin goals in the business. So a little bit of a hiccup here. Actually, this is the third time that I've gone through an ERP switchover and granted, this is the first phase, we would have liked it to have gone a little bit better. But quite honestly, when we think about a $300 million plus business to have 5% overall -- or excuse me $5 million overall impact, we need to do better and we will focus on lessons learned, but it impacted our quarter but it was not as bad as I've experienced in the past.

[Edward Marshall:]

Sure. And just to be clear, I mean the first is always the hardest rollout, right? But this isn't the largest phase that you think you'll tackle as you kind of move forward?

[Robert D. Starr:]

Yes. Just add a couple of things. You're absolutely right. When you move out of a -- call it a test environment to live production, there's always going to be items that had not been necessarily recognized. Things come up and I think, just to echo Neal's comment, Infor, our ERP provider, has done a tremendous job at supporting us, and we couldn't be more pleased. So as it relates to the size, we rolled it out at Minarik which, as we've talked about in the past, is about a 10% or so of the business. And as we roll it out across the remainder of our legacy Distribution businesses and roll up those disparate systems, we would expect the phases to be not too dissimilar in size. Part of the reason we chose Minarik is, well, it's because it does have slightly lower transaction volumes relative to the core KIT business, and we felt this was the absolutely right place to really roll out the system initially to work out the bugs.

[Edward Marshall:]

Okay. And then just a final question. You pointed out the sales force expansion cost is -- a portion of the revision in guidance. I don't know if it changed from maybe last quarter or so. I did see that we talked about this in the prior quarters. Was it bigger than you anticipated? Or was there additional salesman hired in the third quarter as to maybe why the costs were pointed out as part of the guidance revision?

[Robert D. Starr:]

I don't -- Ed, I don't think our expectations have changed materially, as it relates to the dilutive impact we're experiencing. So there really hasn't been a change. I think we're providing just a bit more clarity as to what that impact is.

[Operator:]

And your next question comes from Eli Lustgarten.

[Eli S. Lustgarten:]

Can I just have two clarifications? One, the tax rate will be 34% for the year. Is that going to be the new run rate for next year? Or is that just a onetime situation bringing in down? And 2, you keep referencing Mexico being -- so can you just tell us what's going on in Mexico because we've seen very mixed results, and we've seen actually better performance from some of the other people in the business?

[Robert D. Starr:]

Okay. Let me first address the tax, Eli. I would go ahead and presume that 35% which is the statutory rate, is really our go-forward rate. We've had a number of discrete items this year impacting the tax rate, so it's difficult to say whether we'll have the same level of repeats, as it relates to discrete items going forward.

[Neal J. Keating:]

And, Eli, if I can handle the Mexico question. We have had -- we have struggled with performance in Mexico, driven initially by some mining contracts that we took on really a much larger basis than we'd taken before, and we struggled through those. We've also encountered a downturn in Mexico, which I think other companies operating there have seen as well. We've taken some steps with a new country manager in place, and we're rebuilding both the operations side and the sales side of that business, to structure it for improved performance as we go forward. But it has impacted our near-term performance, both from market conditions and also some steps that we've taken to change out and rebuild that organization, so that it's solid for us going forward.

[Eli S. Lustgarten:]

All right. So we talked a little bit about what you're seeing, both in the Distribution and especially in the fluid power business, as you look out into the fourth quarter and beyond. I mean the fluid power business is softening quite a bit because the ag market is falling apart and mining is something we know is going to stay weak and continue. I mean it's very predictable at this point given what's going on in the mining ventures and what's going on in coal. Can you give us some sense of what you're seeing, particularly in fluid power because the reports that we got out of both Parker and Eaton have some issues in the fourth quarter, if you look at them?

[Neal J. Keating:]

Eli, you have a really good point. What I believe that both Eaton and Parker were particularly referring to in the ag markets, et cetera, are the -- is the business that they do directly.

[Eli S. Lustgarten:]

The OEM is down 19%. We know that.

[Neal J. Keating:]

Yes. So we don't have a big ag component of our fluid power business. We're really more focused on the industrial market and also with -- increasingly with our OEMs, as we cross-sell those products through our Zeller and Minarik and ACE platform businesses. So actually, we see fairly solid growth going forward through the fourth quarter. As we said, we saw 6% growth in the base business in the third quarter. We'd probably not be all that dissimilar. Some of it might vary based on shutdowns for our end customers. But I think that we see a pretty good fourth quarter. Overall, for the year, maybe not quite as strong as we would have expected, but on a third quarter to fourth quarter, I don't think we would detect a big change because we don't have that kind of correlation to some of the big OEM businesses that the suppliers like Parker and Eaton do.

[Eli S. Lustgarten:]

And if you permit me one more. A lot of the distributors have been talking about a slowdown or a timing of incentive payments and support payments and rebate payments or so. What are you seeing and kind of what have factored in as you look out into the fourth quarter and into next year?

[Robert D. Starr:]

A couple of things there, Eli. You're right. A number of folks have addressed the reduction in rebate income as a contributor to perhaps some of the margin challenges they're facing. We certainly have good relations with our key vendors, and we're very much focused on increasing COGS through those vendors that provide us the most support. And we have our initiatives to make sure that our rebate income remains in level with historical standards.

[Eli S. Lustgarten:]

You're not seeing much impact at this point from anyone and you expect it to stay normal. Is that how I should read it?

[Robert D. Starr:]

Yes, that's how you should read it.

[Operator:]

Your next question comes from Scott Graham.

[R. Scott Graham:]

Neal, you made a comment earlier in answering a question. I guess, I was a little bit confused on the answer. You said that you had -- so you had 2% organic in Distribution but that the growth was plus 7% and then it dropped down to minus 2% at the end of September. Could you -- was the cost so 7% in September. Is that what you meant? Or was that quarter-to-date through September?

[Neal J. Keating:]

Yes. Thanks for the question, Scott, so we can get a clarification. Through the first -- almost 3 quarters of September, we were a plus 7% growth year-on-year organically. And then in the last 2 weeks, we went to a minus 2.5% to minus 3%. So that's how we ended up where we felt confident halfway through, up to 2/3 of the way through the month of September that we'd have 3% organic growth for the quarter. That's where we really experienced the downturn that took us from a 3% expectation to a 1.7% reality.

[R. Scott Graham:]

Got it. I understand now. When we look at the Distribution margin, there's obviously very little wiggle room in there for something to go wrong at the levels that it's at right now. I was wondering with these acquisitions now in the fold, getting more comfortable with the Rogers acquisition, is there anything you guys are now looking at structurally where we could maybe take some more costs out, get that margin back into that old 7% to 8% goal line that we were looking for a little bit faster because it just -- it seems that it doesn't take much disruption to kind of keep you at the 5%. And so I'm just wondering if you -- with these operations now running, if you see anything that you can structurally do to lift that margin up, so that we have a little bit more wiggle room each quarter.

[Neal J. Keating:]

Good question, Scott. I'll break it down, maybe, into 3 areas and certainly leave it for Rob to add in. Obviously, for us to achieve our longer-term profit goals for that business, we need to have a higher organic growth rate than we've experienced over the last 3 to 4 years. And that is one of the reasons where a structural change has been additional sales resources and even though adding some cost in the near term, we feel that, that's really important to driving the top line growth that we need to get the operating leverage and contribute to those higher margins. The second, a little bit smaller impact, is that we need to make the improvements that we are planning in Mexico because it is a drag today, and we need to reverse that to it being a positive. However, the largest single structural change that we are going through, Scott, is the implementation of our ERP system. That is what is going to enable us to reduce our costs by reducing from some 12 different ERP systems to 1. It will enable us to integrate the back offices of the acquisitions that we've done over the past 4 years where we have not taken that step yet because we didn't want to switch them twice. So when you combine those back-office efficiencies with improved purchasing elements that we know will be available to us, that's really the most fundamental. What you also saw in the third quarter, the charge that we took, was the consolidation of the marketing group from an acquired company into our main headquarters marketing group here in Bloomfield. And those kinds of things, we've been able to do in marketing areas, but none of the back-office accounting, AR, AP and purchasing areas. So that's by far the largest structural change we're implementing to our business today that will help drive improved performance.

[R. Scott Graham:]

That's great. Just one last question if I may. What were -- if you said this, I'm sorry. I don't think you did. The JPF units shipped in the quarter and year-to-date?

[Robert D. Starr:]

Sure. I got that one. Thanks, Scott. Year-to-date, we've delivered about 17,500 fuzes. The majority of which has been the USG or FMS sales, we've had significantly lower direct commercial sales of the Joint Programmable year-to-date. In the quarter, we've delivered 6400 Fuzes, of which 98% of those were USG. Last year, through the third quarter, we delivered 14,000 fuzes, about 3500 fewer fuzes than this year. The mix was considerably different. Year-to-date, it was about half and half DCS, and USG and FMS. And for the quarter, about 7 -- the quarter last year, it was about 75% direct commercial sales. So certainly, quite a difference in the product mix.

[R. Scott Graham:]

Right. And is that leading your confidence, Rob, in that the fourth quarter mix should be improved? And by extension, does that mean 2015 gets started off well, mix wise --2015?

[Robert D. Starr:]

A couple of things. I'll address the full year. We expect it to deliver between 23,000 and 25,000 fuzes for the year. I wouldn't expect, Scott, that there will be a material change in the mix between USG and direct commercial sales. We're not expecting a major change in that makeup. And it's very difficult to say what it would look like in 2015. We are -- these direct commercial orders are long lead items. It's very difficult to tell where are those negotiations. We typically have these sales every year. It's just -- its volatile year-to-year what those levels will be just based upon commercial -- sorry, customer needs.

[R. Scott Graham:]

Got it. I thought -- where you said somewhere, mix was positive in the fourth quarter. Perhaps I misread then. I understand that, Rob.

[Robert D. Starr:]

All right.

[Operator:]

[Operator Instructions] Our next question comes from Jeff Hammond.

[Jeffrey D. Hammond:]

Just a quick follow-up on the September issue. It seems like it was isolated to Minarik and Zeller and maybe a little bit of ERP. But can you explain like what exactly is happening there and what caused the weakness?

[Neal J. Keating:]

Jeff, I think that what we tried to convey was that for the quarter, a lot of the weakness was encountered in our Minarik and Zeller businesses. But that was not the sole contributor to the decline in the last 2 weeks of September. We've looked at that really hard, Jeff, over the last 2 to 3 weeks. And we know the regions, we know our Intermountain Mountain region was down. We know that we had some specifics there related to mining. We know that South was down, and we know that the Northeast was down a little bit as well. But in those other 2 regions, not any one market, either product or industry market that jumps off the page at us. And similarly, we did have a very, very strong close to the third quarter in 2013 and that may have -- and a lot of that was driven by very strong performance from Zeller and Minarik last year. So maybe we just lost a little bit from year-to-year in those businesses, but that's the best analysis we've really been able to develop to this point.

[Robert D. Starr:]

And, Jeff, I was just going to add a little more color for you as it related to Minarik and Zeller. Certainly, at Minarik, the ERP had its impact, as we've discussed. At Zeller, really some programs that we had expected have gotten pushed out. There has been an increase in the backlog in that business. So we feel confident that those will all get converted to sales, just not in the time that we've expected.

[Jeffrey D. Hammond:]

Okay. And the plus 5% in October, was that kind of a continuation of fluid power and power transmission doing well and Minarik and Zeller being weak?

[Robert D. Starr:]

Certainly, our legacy business delivered good results during October. But what I would tell you is that Minarik certainly had a very decent October. So we're starting to see them stabilize out of the ERP implementation. So there wasn't anything specific. Zeller, once again, some program pushouts, so relative growth rates relative to last year were somewhat impacted by that.

[Jeffrey D. Hammond:]

Okay. And then how should we start to think about corporate expense into '15? You had kind of a little bit of jump and maybe within that, just mention pension, both expense and cash contribution?

[Robert D. Starr:]

Okay. Jeff, certainly we've talked on prior calls regarding some of the impacts for the full year, those being the building maintenance. We've had campus wide improvements here that all roll at corporate even though not 100% all necessarily directly housing corporate folks, but that's how the expense rolls up. We've had incentive comp, pension and acquisition costs this year that have driven our costs higher than the prior year. Looking to '15, once again, we'll provide our full year outlook in February, Jeff. But certainly, we would expect there to be, call it, low to mid-single-digit growth there. I mean, certainly, nothing in the range that we saw this year.

[Operator:]

And our next question comes from Arnie Ursaner.

[Arnold Ursaner:]

2 questions sort of going on the same theme. Have you thought about where the customers may have preordered over concern about availability with the ERP system and maybe once they got comfortable, that's perhaps a reason why October has seen a pickup?

[Neal J. Keating:]

Arnie, that's certainly a plausible explanation for some of it. And in fact, we did see that earlier in the year as we talked about transitioning our German bearing operations into a new facility. We did have a number of customers that preordered, so that they could assure themselves supply as we transition in that case to a new facility. But I would certainly expect that some of it may have been caused by exactly that phenomena.

[Arnold Ursaner:]

Okay. And then one of your shareholders and I were chatting last night, so I'll ask the question on his behalf. I would never ask this. But when you have an ERP system, and we have a history that goes a long way back with you guys with the Australian contract, how should we have some confidence that the quarterly problems you had this go around in ERP won't linger for an extended period of time? Maybe you could speak a little more about your plan to avoid that.

[Neal J. Keating:]

Well, Arnie, can I ask a clarifying part? You mentioned the Australian helicopter program?

[Arnold Ursaner:]

Back to the -- it was a onetime item that lasted about 7 years.

[Neal J. Keating:]

I got you. I understand that one. Arnie, we know every ERP transition is difficult. We felt that in combination with Infor, we had a very strong project plan for this. And we still had clearly some things that when we shifted from that test environment to a production environment that we learned. Part of it was in the responsiveness of the system, which we've been working on and part of it is, well, was in the interaction of various software systems, as you can imagine. We have a warehouse management system that has to integrate with this. We have a tax ware system that has to integrate with this. We have a customer, CRM systems. So we encountered a number of issues in the interoperability of those systems that now we believe we have primarily behind us. We understand that we need to do a better job in understanding what the impacts will be on future go-lives as we shift to this new system. I think we have learned quite a bit through this initial phase, and I think our plan was sound in going live with a relatively small portion of our business. We will continue to take that approach of going forward in smaller manageable chunks. And it is one where we just have to assure that we can implement that plan in a sound basis going forward. There will always be differences, unfortunately, in each different part of the business that we bring on. I think that maybe anticipating those inefficiencies and being able to discuss those earlier, as we enter the quarter or as we are 2 or 3 quarters ahead of that, more effectively will be an important part of that process as well.

[Arnold Ursaner:]

And a very short-term question. The Q3 impact of adding extra people, you obviously are seeing a good volume pickup, but are you also continuing to incur higher kind of onetime or emergency expenses to manage the growth?

[Neal J. Keating:]

Well, I think that we incurred some emergency expenses in the third quarter, Arnie, associated with additional resources that we put on our ERP go- live. I don't think that we're seeing any additional onetime charges associated with the sales force expansion except for we got through in the third quarter, I think, the last portion of recruiting expenses for that team, but I think we should largely have the onetime expenses for the sales force expansion behind us now.

[Arnold Ursaner:]

I was thinking more on the ERP where you had to add people for deliveries.

[Neal J. Keating:]

Yes, you're exactly right. We did add people in that area to provide additional customer support resources.

[Arnold Ursaner:]

And did that continue in Q4? And is that embedded in your current margin view?

[Neal J. Keating:]

Yes, Arnie, we have included some of that, and it is embedded in our current outlook.

[Operator:]

Ladies and gentlemen, we have no further questions at this time. So I'd now like to turn the call over to Eric Remington for closing remarks.

[Eric B. Remington:]

Thank you all for joining us today. We look forward to speaking to you again when we report our fourth quarter and full year results in February. Have a good day.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect, and good day.